PETALING JAYA: IHH Healthcare Bhd’s RM1.02 billion acquisition of Prince Court Medical Centre Sdn Bhd (PCMC) is seen as a positive move by analysts, citing possible synergies between the group’s existing network of hospitals.
Affin Hwang Capital pointed out that PCMC’s earnings before interest, taxes, depreciation and amortisation (ebitda) margin of 17% is significantly lower than IHH Malaysian operations’ 29% as it is reaching structural limitation as a standalone single hospital, unlike the economies of scale IHH is able to derive having own a wide network of hospitals.
“Hence, by integrating PCMC’s existing business functions, systems and personnel with IHH’s established shared services and business functions structure that services its existing hospital network in Malaysia, there is plenty of potential headroom to grow via medical supply procurement and cost synergies,” said the research house in a note yesterday.
Affin Hwang is keeping a “buy” call on IHH with a target price of RM6.40.
It highlighted that PCMC has a similar revenue intensity, occupancy and payer mix to IHH’s flagship hospitals in Klang Valley, but the contribution from the acquisition is expected to be minimal in the near-term after taking into account the financing cost for the acquisition.
At the moment, IHH is working on the scenario of funding 64% of the purchase consideration via bank borrowings.
The research house estimated that based on an indicative interest rate of 4.13% on the borrowing of RM650 million, the interest expense for the acquisition is estimated to be RM26.8 million, which is slightly above PCMC’s FY18 core net profit of RM26 million.
Post-acquisition, IHH’s gearing is expected to increase from 0.48 times to 0.51 times. Note that a one-off estimated expense of RM11 million relating to the proposed acquisition will be incurred upon completion of the transaction.
PCMC is a debt-free profitable operating hospital, with a reported RM260 million revenue, RM44 million ebitda and RM51 million net profit in FY18. Stripping off the writeback of deferred tax of RM25 million, FY18 core net profit came in at RM26 million.
Its FY18 revenue and ebitda represent 13% and 8% of IHH’s FY18 Malaysian operations’ revenue and ebitda respectively. However, in term of the entire IHH group, PCMC’s revenue, ebitda and core net profit contribution to the group are only around 2%.
With regard to the valuation, Affin Hwang sees the RM1.02 billion purchase price as fair as it represents the midpoint of the fair value of between RM960 million and RM1.08 billion.
In addition, it was also lower than the seller’s original cost of investment of RM1.09 billion in August 2018.
Public Bank Investment Research echoed such views, but noted that the earnings uplift is not material as it only makes up of about 6% of IHH’s bottom line.
“Judging on IHH’s capability to turn Fortis around ahead of its targeted 100 days, we believe IHH can also bring PCMC to greater heights going forward.”
It is maintaining an “outperform” call on IHH with an unchanged target price of RM7.
On Bursa’s close today, the stock gained 6 sen or 1.05% to RM5.75 on 1.88 million shares done.
